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Cyclical net entry and exit

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  • Bernstein, Joshua
  • Richter, Alexander W.
  • Throckmorton, Nathaniel A.

Abstract

This paper examines how the interplay between cyclical net entry and exit of firms and search and matching frictions affect business cycle dynamics. We show cyclical net entry and exit reallocates inputs across firms and destroys jobs in recessions, which amplifies and skews business cycle dynamics. The model matches the volatility and skewness of real activity, the fast rise and slow decline in unemployment that occurs in recessions, and the counter-cyclical variation in macroeconomic uncertainty. Cyclical net entry and exit generates a 20% increase in volatility, 40% increase in skewness, and 55% increase in the welfare cost of business cycles.

Suggested Citation

  • Bernstein, Joshua & Richter, Alexander W. & Throckmorton, Nathaniel A., 2021. "Cyclical net entry and exit," European Economic Review, Elsevier, vol. 136(C).
  • Handle: RePEc:eee:eecrev:v:136:y:2021:i:c:s0014292121001057
    DOI: 10.1016/j.euroecorev.2021.103752
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    Cited by:

    1. Joshua Bernstein & Alexander W. Richter & Nathaniel A. Throckmorton, 2022. "The Matching Function and Nonlinear Business Cycles," Working Papers 2201, Federal Reserve Bank of Dallas.

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    More about this item

    Keywords

    Firm entry; Firm exit; Unemployment; Nonlinear; Skewness; Welfare; Uncertainty;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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